Public health sector has stabilized after turbulent decade

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Not-for-profit hospitals and healthcare systems are positioned to weather headwinds facing the medical profession in the next decade, according to analysts.

Both Fitch Ratings and Moody’s Investors Service changed their credit outlooks on nonprofit hospitals and healthcare systems to stable from negative this month, citing their response to operational challenges through cost cuts and improvements in efficiency. The sector has faced a obstacles during the past few years that range from a shift to value-based reimbursements to a shortage of qualified nurses.

“The ability of not-for-profit hospitals to respond to the headwinds have improved,” Fitch senior director Kevin Holloran said in a phone interview. “Management teams have risen to the occasion in responding to the challenges.”

A Dec. 10 Fitch report found that hospitals have achieved balance sheet stability after adapting to the reality of higher labor and pharmaceutical costs, value-based reimbursement models, a shifting payor mix, commercial insurance rate increases, and competition from non-traditional market entrants. Holloran said most providers have begun to align their cost models to revenue pressures, with many expected to pursue consolidation in an effort to improve efficiency and gain contracting leverage with payors and suppliers. Balance sheet measures are now at levels not seen since before the Great Recession of 2008, according to Fitch.

Fitch and Moody’s both said that consolidations will increase in 2020, especially among community hospitals and smaller systems that are currently handcuffed from pursing large capital projects or making big investments in technology. Holloran said that mergers & acquisitions will help smaller rural hospitals to gain leverage when negotiating rates with insurance companies.

Moody’s projected in a Dec. 9 report that operating cash flow in the U.S. healthcare sector will grow by 2% to 3% over the next 12 to 18 months, driven largely by stronger revenue growth from Medicare and commercial reimbursement rate increases. Tighter expense management will also boost hospitals, though rising labor costs will persist along with risks posed by legal challenges to the Affordable Care Act that result in fewer insured patients.

“This is a sector facing an incredible amount of social, legislative and political risk,” Moody’s analyst Dan Steingart said in a phone interview. “It creates for a background of risk that could shift the sector back to the negative.”

The ACA’s future rests in the courts after 20 state attorneys general filed a lawsuit in Texas last year arguing that the law is unconstitutional. A federal appeals court struck down the ACA’s individual insurance coverage provision on Dec. 18 and ordered a lower court to review the review how much of the entire law should stand. The issue may ultimately head to the U.S. Supreme Court, and Steingart said that a negative ruling would have “painful implications” for hospitals if millions of individuals lose insurance.

Holloran stressed that the ACA’s fate is just one of the wildcards in play that could alter the healthcare sector’s stable outlook after the 2020 election and beyond. Some presidential candidates have proposed new or expanded federal healthcare programs, including a shift to a single-payer system known as “Medicare for All," which Holloran said has the potential to hurt hospitals by shifting reimbursement from more profitable commercial rates to lower governmental rates.

“It’s not an overwhelmingly stable outlook,” Holloran said. “There are a few things that could happen that could upset the applecart.”

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Bond ratings Not-for-profit healthcare Fitch Moody's